Germany Weighs Bank Split

FRANKFURT—Germany's ruling coalition will propose a plan to isolate banks' risky activities from customer deposits, according to a draft law seen by The Wall Street Journal on Wednesday.

Under the draft law, banks with proprietary trading, high-frequency trading or hedge-fund-financing operations that make up either 20% of the balance-sheet value or surpass €100 billion ($135 billion) in value will be required to transfer their risky businesses into legally and financially separate units.

Analysts said it was unclear how the plan would affect Deutsche Bank.
Getty Images

It is unclear how many banks the new rules will affect, analysts said, and the number will likely depend on how some of the risky activities are defined. Deutsche Bank AGDB0.78%, Europe's largest bank by assets with a nearly €2.2 trillion balance sheet, shut down its proprietary-trading unit in 2008 but maintains large high-frequency-trading and prime-brokerage arms.

Analysts said details were insufficient to determine how the law might affect Deutsche Bank, although it could hurt the bank's attempts to bolster its financial strength if it is forced to hive off business units and set aside capital for them.

"It will not be helpful [for Deutsche Bank]. It's all about the extent to which it will not be helpful," said Christopher Wheeler, a banking analyst with MediobancaMDIBY45.20% in London.

Germany's banking sector opposes the measure. "There has so far not been any evidence that separating the trading businesses will increase financial-market stability," Michael Kemmer, president of the Association of German Banks, said. "There is no need for this hasty legislative initiative."

While market-making activities won't be automatically affected by the law, German banking regulator BaFin will be given the right to determine whether such activities could be destabilizing, and the power to stop banks from undertaking them. In addition, the law would require that banks submit wind-down and contingency plans in case of financial trouble, which have already been requested by BaFin.

The proposed rules would most likely affect Deutsche Bank, Commerzbank AGCRZBY0.70% and Landesbank Baden-Wuerttemberg, as institutions with large trading operations. Representatives of Deutsche Bank and Commerzbank referred to the statement by the banking association. LBBW declined to comment.

Last week, European plans to require banks to separate high-risk financial activities such as investment banking from their retail banks received a boost when the governments of Germany and France backed proposals by a group of experts led by Finland's central-bank president, Erkki Liikanen.

The ideas of the so-called Liikanen group are aimed at preventing the spread of financial trouble from toxic parts of a bank's balance sheet into healthy parts of the business, which could destabilize banks and force governments to bail them out in order shore up the broader financial system.

France is also in the midst of passing a similar law, which would force banks to hive off only a small share of their investment-banking activities into separate entities, the governor of the Bank of France said at a parliamentary meeting Wednesday.

"On average, the assets that would be confined if the law was voted today would represent on average 3%" of banks' revenues from market activities, Christian Noyer said. He said he believes the French parliament is right to avoid forcing French banks to give up too much of their activities, particularly market-making activities for companies and France's government debt.

The European Union will press ahead with proposals in September to ringfence the region's retail banks from risky trading activities, a spokesperson for the European commissioner for internal markets, Michel Barnier, said Wednesday.

"Commissioner Barnier is firmly committed to present legislation based on the Liikanen report….in September of this year," the spokesperson said. "In this work, Commissioner Barnier will act to implement a key principle: When banking activities continue to raise a systemic risk—in spite of all EU rules that we are putting in place—such activities would have to be structurally separated from the rest of the banking activities."

The German draft bill will be presented to the cabinet next week and then will need to be approved by the lower house of parliament.

If approved, it would go into force in January 2014 and would require banks to come up with a plan for hiving off risky activities by July 2014. All of the risky businesses would need to be fully isolated by July 2015.

The plan is a signature banking reform by Chancellor Angela Merkel's center-right Christian Democrats, who are campaigning to stay in power in Germany's elections in September. The main opposition Social Democrats presented their own plan last year, calling for German banks to separate their investment-banking and retail-banking businesses.

German opposition parties criticized the draft law on Wednesday, saying it wouldn't make the banking industry significantly safer.

"This bill is totally inadequate," Gerhard Schick, a Green party spokesman on finance issues, said in a statement. He said it wasn't even as effective as the Liikanen proposals, which Mr. Schick called the "absolute minimum" overhaul that is needed.

Deutsche Bank's co-chief executives Anshu Jain and Jürgen Fitschen have repeatedly warned against penalizing or splitting universal banks that combine securities trading and deposit taking, which they argue are more stable in a crisis because they have more diversified sources of earnings. Banks' critics, including some German politicians, respond that the universal-banking model helps make the banks too big and interconnected to fail.

—Harriet Torry, William Horobin and Laurence Norman contributed to this article.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.